CSX Transportation announced on Dec. 16 that CEO E. Hunter Harrison had died and that recently-hired chief operating officer James M. Foote will serve as acting CEO of the Class I railroad company.
Foote began serving as acting CEO on Dec. 14 two days earlier, when it was announced that Harrison had taken medical leave.
In late October, CSX hired Foote to work under the 74-year-old Harrison, a move Harrison later admitted was part of a succession plan. At October events Harrison had difficulty concentrating and responding coherently, and was dependent on an oxygen tank for an undisclosed ailment. No cause of death was reported.
Harrison’s health condition may have driven his precipitous implementation of a new operational model at CSX, causing massive disruption in operations and system-wide service failures. Last July, he described himself as “a short-timer.” In March he signed a four-year contract, receiving an estimated $300 million in compensation.
Under Harrison’s direction CSX fired 4,000 workers, mothballed nearly a thousand pieces of equipment, and closed rail yards to slash costs and boost its stock price.
At an investment bankers’ meeting at the end of November, Harrison continued to assert that the service problems created by implementation of a business model he called “Precision Scheduled Railroading” (PSR) were exaggerated and continued to blame CSX customers for creating delays.
The impact of Harrison taking medical leave on Dec. 14 was immediate. On Dec. 15 the CSX stock plunged 12% before trading opened, and finished the day with a 7.3% loss, making it one of the day’s biggest losers on the S&P 500. To steady the ship, Foote held a conference call with Wall Street analysts that same day. Afterwards, analyst opinions ranged from seeing CSX’s future as “very cloudy” to concluding that most of what investors expected Harrison to do at CSX had already been done.
No radical changes are anticipated because the 63-year-old Foote earlier worked under Harrison at Canadian National for 11 years as executive vice president of sales and marketing, and has fully embraced the PSR model and Harrison’s implementation at CSX.
“I believe that the battleship here has turned,” Foote declared during the Dec. 15 conference call. “I do not see any reason to diminish our expectations concerning the pace and magnitude of our future progress.” However, Foote did not address continuing customer complaints about service failures in his statement.
A Checkered Career
Responding to Harrison’s passing, CSX board chairman Edward J. Kelly III, said, “With the passing of Hunter Harrison, CSX has suffered a major loss. Notwithstanding that loss, the board is confident that Jim Foote, as acting CEO, and the rest of the CSX team will capitalize on changes that Hunter has made. The board will continue to consider in a deliberative way how best to maximize CSX’s performance over the long term.”
Over his more than 50-year career in railroading, Harrison gathered a raft of awards and honors, and was widely respected for his accomplishments. But in the later years of his career that sterling reputation became tarnished.
When he was a 20-year-old college student, he took his first railroad job in 1964 as a carman-oiler and then a train operator for the St. Louis-San Francisco Railway. He worked for Burlington Northern after it purchased Frisco in 1980, eventually becoming vice president. He left BN and for Illinois Central in 1989, serving as vice president and COO before becoming president and CEO in 1993. When IC was bought by CN in 1998, he was named vice president and COO. He left in 2003 to become president and CEO of CN, retiring in 2009.
Then things got complicated. In 2011, Harrison was approached by hedge fund manager William Ackman, who was undertaking a proxy battle with the board of Canadian Pacific. Ackman offered to appoint Harrison as CEO of CP should he win his proxy battle. Ackman was ultimately successful and in 2012, Harrison was named CP’s CEO.
CN then halted nearly $40 million in benefits for Harrison and sued him for breaching confidentiality agreements dating from his 2009 retirement when he participated in Ackman’s CP proxy battle.
Controversy also pursued Harrison when, with Ackman’s backing, he sought to merge CP with Norfolk Southern in 2015. Shippers expressed outrage, NS management fought back and the Surface Transportation Board (STB) raised serious questions about the merger, resulting in CP backing off in mid-2016.
On Jan. 18, 2017, Harrison abruptly resigned as CEO of CP and joined hedge fund manager and Ackman acolyte Paul Hilal in an ultimately successful attempt to take over CSX, which agreed to pay Harrison about $300 million, largely to make up for deferred compensation he lost by quitting CP.
At the STB Oct. 11 session, he defended his personal integrity and commitment to rail safety, which was ingrained in him when he was covered in blood from carrying another employee’s body after an accident chopped both that man’s legs off at the groin. “The worst experience in my career was to go to the door of a home and explain to the mother and kids that their father was not coming home,” he recalled.
Harrison is survived by wife Jeannie, daughter Cayce and son-in-law Quentin Judge, and a granddaughter, also named Hunter.
STB & Shippers Unhappy
On Dec. 14, the same day Harrison announced his medical leave, the STB sent him a letter seeking more detailed data on the progress he continually claimed was being made at solving CSX’s service problems.
The board continues to hear reports of inadequate service, particularly in regard to unsatisfactory last-mile performance and the railroad’s failure to communicate with shippers about service changes before they occur.
The STB told Harrison to explain CSX’s lack of progress in improving car order fulfillment, and its poor local service performance, including missed switches and inadequate on-the-ground communication and coordination with customers.
The board also informed Harrison that it had voted to seek additional information on CSX participation in the Chicago Transportation Coordination Office, which Class I railroads use to gather and report weekly and semi-annual performance data to the STB.
During the board’s Oct. 11 public listening session, Harrison was asked about the railroad’s participation and disdainfully declared that he saw no point to CSX participating in CTCO, to the surprise and dismay of the STB members.
On Nov. 14, the Rail Customer Coalition wrote to both the STB and congressional leaders highlighting some of the persisting service issues. “The board should know that many shippers are continuing to experience significant problems. This includes major service changes with little notice, missed switches and poor communication on delivery status,” RCC said.
“With CSX closing additional yards since the [Oct. 11] listening session, rail customers remain very concerned about the resiliency of the rail network to meet customer demand now and into the future,” the coalition added.
RCC also urged the board to be more proactive by investigating the root causes of the CSX service failures, create an expedited process for alternative service options, require reporting of meaningful service metrics, and open up reciprocal switching to give customers greater access to competing railroads.
One stumbling block to action by the STB is that it currently consists of only two members: acting chairman Ann D. Begeman and vice chairman Deb Miller. Congress mandated that the board consist of five members, raising the question of whether it lacks a quorum to take actions that require a vote. President Trump has yet to announce board nominees, who require Senate approval.
Reducing Safety, Raising Fees
Safety continues to be a concern as well. At the Oct. 11 board listening session, local community officials cited the economic costs and safety dangers posed by CSX train lengths, which under Harrison grew from a maximum of 1.5 to three miles. When the trains are delayed they become impassable steel walls that divide communities and block first responders. Local officials say the problem has only gotten worse and have sought help from members of Congress.
In October, CSX announced that it was buying back $1.5 billion in stock. Analysts believe such buyback initiatives can strengthen a company and bolster its stock price—or are primarily intended to allow large shareholders to cash out.
CSX also quietly withdrew from a previous commitment to contribute one-third of a $425 million investment for raising a tunnel that would allow double-stack trains to service Baltimore, citing “the operating changes that CSX’s new leadership team has made over the last several months” as the cause.
Earlier this fall the company began a $2.3 million interior renovation of the executive offices in its Jacksonville, Fla., headquarters. These include upgrading C-suite offices and conference rooms, creating two private dining areas and building a recording studio. That was in addition to $1.35 million to be spent in renovating the building’s coffee shop and cafeteria, and addition of a concession stand and drop-off dry cleaner service.
On Nov. 15, CSX informed customers it was unilaterally raising some fees and increasing demurrage charges in 2018. Demurrage is a sore spot for shippers, who blame CSX service failures for their inability to return equipment to the railroad on time. Statements coming from CSX reveal it expects the demurrage increases to serve as a stick for encouraging shippers to return railcars earlier.
In 2018 demurrage for standard railcars will jump from $105 to $150 a day, while hazmat tank cars will increase from $175 to $250 per day and refrigerated cars from $200 to $250 per day. Also, CSX said charges for overloaded and unsafely loaded cars will both jump from $750 to $1,000.
That’s one way to fuel turning around a battleship—or at least for operating the bilge pumps that keep it afloat.